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Dubai’s decree

Dubai's real estate market has perhaps been under greater scrutiny in the aftermath of the credit crunch than during the boom years of the mid 2000's. After the price falls of late 2008 and 2009, some stability now appears to be returning to the market.

Retaining that stability and creating a solid base for future growth are priorities for the Dubai Government and the Dubai Land Department (the DLD) – the entity that operates the land register for Dubai. It appears that (compared to the boom years) the authorities intend to keep a tighter control on the supply of completed real estate coming onto the market. Given that the on-going difficulties being experienced in securing mortgage finance in Dubai will restrain demand, the control of supply should have a steadying effect on prices. One of the methods through which supply could be managed is through Decree No. 6 of 2010, which took effect on February 14 2010.

In essence, Decree 6 deals with two issues: (i) the ability of the developer to terminate contracts with purchasers of off-plan units where those purchasers have fallen into arrears and (ii) the ability of the DLD to cancel entire real estate projects.

With regards item (i), Decree 6 will make it easier for a developer to terminate off-plan purchase contracts. Under Decree 6 the termination procedure can be carried out solely by the developer (as opposed to the prior regime, which required the involvement of the DLD). After termination, the developer is entitled to retain an amount of money (linked to the extent of construction completion) from the payments made by the purchaser.

With regards item (ii), Dubai's Law No. (9) of 2009 (which came into force in April 2009) previously introduced the concept that the DLD has the power to cancel real estate projects. Decree 6 expands on this concept providing greater detail as to how and when cancellation can occur.

By exercising this power, the DLD can filter out weak developers and projects that have no prospect of ever being completed. This filtration gives greater certainty as to the numbers of units that will be completed and will come onto the market in the coming years, thereby helping manage prices.

Under Decree 6, following receipt of a technical report on a project, the DLD is entitled to cancel the project in any of the following situations:

  1. Where the developer does not commence construction without acceptable reasons;
  2. Where the developer has committed offences under Article 16 of Dubai's Escrow Law (i.e. embezzlement or fraud related actions);
  3. Where the developer is not committed to proceeding with the project;
  4. Where the master developer terminates the plot purchase agreement due to breach by the developer;
  5. Where the plot is affected by government projects;
  6. Where the developer is grossly negligent in implementing the project;
  7. Where the developer states that it shall not proceed with the project;
  8. Where the developer declares bankruptcy;
  9. Where there exist any other reasons deemed acceptable to the DLD;

If the DLD does cancel a project, the developer has a seven working day window in which it may make an appeal (which must be submitted in writing). The DLD is then to issue its final decision within a further seven working days.

Upon cancellation of a project by the DLD, an auditor will be appointed by the DLD to assess the financial position of the project and to establish the monies that have been paid to the developer and/or credited to the project's escrow account.

The bank with which the escrow account for the cancelled project is held, is to repay all sums in the escrow account to the off-plan unit purchasers within 14 days of cancellation. In the event that the escrow account does not contain sufficient sums to reimburse all the purchasers, the developer is obliged to repay (from its own pocket) any outstanding sums to the purchasers within 60 days of cancellation.

Where the developer fails to repay the purchasers all monies due, the DLD is empowered to take further action to protect the purchasers' interests. This could include referring the matter to the appropriate judicial authorities.

There is no express provision in Decree 6 for a developer to be reimbursed by the master developer for monies paid in respect of the plot of land on which the project was going to be developed. If the developer wishes to try to recover such monies, it would need to resort to the dispute resolution procedure detailed in the contract with the master developer.

It appears that project cancellation by the DLD will be implemented in earnest during 2010 and Dubai-watchers will be keen to identify any trends and whether a specific focus is being made on particular areas or types of development.

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